FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
---
ACT OF 1934 For the quarterly period ended September 2, 2000
-----------------
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from to
Commission file number 1-14893
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THE PEPSI BOTTLING GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-4038356
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Pepsi Way, Somers, New York 10589
------------------------------- -----
(Address of principal executive offices) (Zip Code)
914-767-6000
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(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Number of shares of Common Stock outstanding as of September 29, 2000:
145,719,818
The Pepsi Bottling Group, Inc.
------------------------------
Index
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
12 and 36-weeks ended September 2, 2000 and September 4, 1999 2
Condensed Consolidated Statements of Cash Flows -
36-weeks ended September 2, 2000 and September 4, 1999 3
Condensed Consolidated Balance Sheets -
September 2, 2000 and December 25, 1999 4
Notes to Condensed Consolidated Financial Statements 5-8
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9-14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
Item 4. Submission of Matters to a Vote of Securities Holders 14
Independent Accountants' Review Report 15
Part II Other Information and Signatures
Item 6. Exhibits 16
</TABLE>
-1-
PART I - FINANCIAL INFORMATION
Item 1.
The Pepsi Bottling Group, Inc.
Condensed Consolidated Statements of Operations
in millions except per share amounts, unaudited
<TABLE>
<CAPTION>
12-weeks Ended 36-weeks Ended
-------------- --------------
September September September September
2, 2000 4, 1999 2, 2000 4, 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Revenues.................................................... $2,125 $2,036 $5,583 $5,319
Cost of sales................................................... 1,163 1,162 3,041 3,043
------ ------ ------ ------
Gross Profit.................................................... 962 874 2,542 2,276
Selling, delivery and administrative expenses................... 706 669 2,020 1,892
Non-cash compensation charge.................................... - - - 45
------ ------ ------ ------
Operating Income................................................ 256 205 522 339
Interest expense, net........................................... 44 44 133 141
Foreign currency loss........................................... 1 1 1 1
Minority interest............................................... 16 12 31 19
------ ------ ------ ------
Income before income taxes...................................... 195 148 357 178
Income tax expense.............................................. 72 56 132 69
------ ------ ------ ------
Net Income...................................................... $ 123 $ 92 $ 225 $ 109
====== ====== ====== ======
Basic Earnings Per Share........................................ $ 0.84 $ 0.59 $ 1.52 $ 0.93
Weighted-Average Shares Outstanding............................. 147 155 148 117
Diluted Earnings Per Share...................................... $ 0.82 $ 0.59 $ 1.51 $ 0.93
Weighted-Average Shares Outstanding............................. 149 155 149 117
Pro Forma Diluted Earnings Per Share
As reported..................................................... $ 0.82 $ 0.59 $ 1.51 $ 0.70
Excluding non-cash compensation charge.......................... $ 0.82 $ 0.59 $ 1.51 $ 0.89
Weighted-Average Share Outstanding.............................. 149 155 149 155
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
-2-
The Pepsi Bottling Group, Inc.
Condensed Consolidated Statements of Cash Flows
in millions, unaudited
<TABLE>
<CAPTION>
36-weeks Ended
--------------
September September
2, 2000 4, 1999
------- -------
Cash Flows - Operations
<S> <C> <C>
Net income...................................................................... $225 $109
Adjustments to reconcile net income to net cash provided by operations:
Depreciation.............................................................. 232 252
Amortization.............................................................. 91 90
Deferred income taxes..................................................... (10) (3)
Non-cash compensation charge.............................................. - 29
Other non-cash charges and credits, net................................... 125 91
Changes in operating working capital, excluding effects of
acquisitions:
Trade accounts receivable............................................... (208) (258)
Inventories............................................................. (23) (11)
Prepaid expenses, deferred income taxes and other current assets........ 8 1
Accounts payable and other current liabilities.......................... 108 134
------ ------
Net change in operating working capital .................................. (115) (134)
------ ------
Net Cash Provided by Operations................................................... 548 434
------ ------
Cash Flows - Investments
Capital expenditures........................................................... (342) (371)
Acquisitions of bottlers....................................................... (2) (166)
Sale of property, plant and equipment.......................................... 4 21
Other, net..................................................................... (6) 8
------ ------
Net Cash Used by Investments...................................................... (346) (508)
------ ------
Cash Flows - Financing
Short-term borrowings - three months or less................................... 12 (78)
Proceeds from third-party debt................................................. - 3,260
Replacement of PepsiCo allocated debt.......................................... - (3,300)
Payments of third-party debt................................................... (9) (49)
Dividends paid................................................................. (9) (3)
Treasury stock transactions.................................................... (95) -
Net IPO proceeds............................................................... - 2,208
Decrease in advances from PepsiCo.............................................. - (1,834)
------ ------
Net Cash (Used) Provided by Financing............................................. (101) 204
------ ------
Effect of Exchange Rate Changes on Cash and Cash Equivalents...................... (6) (2)
------ ------
Net Increase in Cash and Cash Equivalents........................................ 95 128
Cash and Cash Equivalents - Beginning of Period................................... 190 36
------ ------
Cash and Cash Equivalents - End of Period......................................... $ 285 $ 164
====== ======
Supplemental Cash Flow Information
Liabilities incurred and/or assumed in connection with acquisitions of bottlers... $ - $ 48
====== ======
Third-party interest and income taxes paid........................................ $ 287 $ 131
====== ======
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
-3-
The Pepsi Bottling Group, Inc.
Condensed Consolidated Balance Sheets
in millions, except per share amounts
<TABLE>
<CAPTION>
(Unaudited)
September December
2, 2000 25, 1999
------- --------
Assets
Current Assets
<S> <C> <C>
Cash and cash equivalents................................................ $ 285 $ 190
Trade accounts receivable, less allowance of $48 at
September 2, 2000 and December 25, 1999............................ 1,000 827
Inventories.............................................................. 311 293
Prepaid expenses, deferred income taxes and other current assets......... 154 183
------ ------
Total Current Assets............................................. 1,750 1,493
Property, plant and equipment, net......................................... 2,296 2,218
Intangible assets, net..................................................... 3,726 3,819
Other assets............................................................... 78 89
------ ------
Total Assets.................................................... $7,850 $7,619
====== ======
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and other current liabilities........................... $1,041 $ 924
Short-term borrowings.................................................... 24 23
------ ------
Total Current Liabilities........................................ 1,065 947
Long-term debt............................................................. 3,270 3,268
Other liabilities.......................................................... 430 385
Deferred income taxes...................................................... 1,128 1,178
Minority interest.......................................................... 307 278
------ ------
Total Liabilities................................................ 6,200 6,056
Shareholders' Equity
Common stock, par value $.01 per share:
Authorized 300 shares, issued 155 shares............................ 2 2
Additional paid-in capital.............................................. 1,736 1,736
Retained earnings....................................................... 354 138
Accumulated other comprehensive loss.................................... (257) (223)
Treasury stock: 9 shares and 5 shares at September 2, 2000 and December
25, 1999, respectively............................................... (185) (90)
------ ------
Total Shareholders' Equity....................................... 1,650 1,563
------ ------
Total Liabilities and Shareholders' Equity...................... $7,850 $7,619
====== ======
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
-4-
The Pepsi Bottling Group, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
Tabular dollars in millions
--------------------------------------------------------------------------------
Note 1 - Basis of Presentation
The Pepsi Bottling Group, Inc. ("PBG") consists of bottling operations
located in the United States, Canada, Spain, Greece and Russia. These bottling
operations manufacture, sell and distribute Pepsi-Cola beverages including
Pepsi-Cola, Diet Pepsi, Mountain Dew and other brands of carbonated soft drinks
and other ready-to-drink beverages. Approximately 90% of PBG's net revenues were
derived from the sale of Pepsi-Cola beverages. References to PBG throughout
these Condensed Consolidated Financial Statements are made using the
first-person notations of "we," "our" and "us."
Prior to our formation, we were an operating unit of PepsiCo, Inc.
("PepsiCo"). On March 31, 1999, we offered 100,000,000 shares of PBG common
stock for sale at $23 per share in an initial public offering generating $2,208
million in net proceeds. These proceeds were used to repay obligations to
PepsiCo and fund acquisitions. Subsequent to the offering, PepsiCo owned and
continues to own 55,005,679 shares of common stock, consisting of 54,917,329
shares of common stock and 88,350 shares of Class B common stock. PepsiCo's
ownership has increased from 35.4% on March 31, 1999 to 37.8% of the outstanding
common stock at September 2, 2000 as a result of net repurchases of 9.3 million
shares under our share repurchase program, which began in October 1999. PepsiCo
also owns 100% of the outstanding Class B common stock, together representing
45.9% of the voting power of all classes of our voting stock. In addition,
PepsiCo owns 7.1% of the equity of Bottling Group, LLC, our principal
operating subsidiary, giving PepsiCo economic ownership of 42.2% of our combined
operations at September 2, 2000.
The accompanying Condensed Consolidated Financial Statements include
information that has been presented on a "carve-out" basis for the periods prior
to our initial public offering. This information includes the historical results
of operations and assets and liabilities directly related to PBG, and has been
prepared from PepsiCo's historical accounting records. Certain estimates,
assumptions and allocations were made in determining such financial statement
information. Therefore, these Condensed Consolidated Financial Statements may
not necessarily be indicative of the results of operations, financial position
or cash flows that would have existed had we been a separate, independent
company from the first day of all periods presented.
The accompanying Condensed Consolidated Balance Sheet at September 2, 2000,
the Condensed Consolidated Statements of Operations for the 12 and 36-weeks
ended September 2, 2000 and September 4, 1999 and the Condensed Consolidated
Statements of Cash Flows for the 36-weeks ended September 2, 2000 and September
4, 1999 have not been audited, but have been prepared in conformity with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. These
Condensed Consolidated Financial Statements should be read in conjunction with
the audited consolidated financial statements for the year ended December 25,
1999 as presented in our Annual Report on Form 10-K. In the opinion of
management, this interim information includes all material adjustments, which
are of a normal and recurring nature, necessary for a fair presentation.
-5-
Note 2 - New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for hedging activities and derivative instruments, including
certain derivative instruments embedded in other contracts, which are
collectively referred to as derivatives. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value.
In July 1999, the FASB issued Financial Accounting Standard 137, delaying
the implementation of SFAS 133 for one year. SFAS 133 will now be effective for
our first quarter of fiscal year 2001. In June 2000, the FASB issued Statement
of Financial Accounting Standard 138, amending the accounting and reporting
standards of SFAS 133.
While the impact of the adoption of these pronouncements is dependent on
the fair value of our derivatives and related financial instruments on the date
of adoption, it is not expected to have a material impact on our results of
operations.
Note 3 - Seasonality of Business
The results for the third quarter and first 36-weeks are not necessarily
indicative of the results that may be expected for the full year because of
business seasonality. The seasonality of our operating results arises from
higher sales in the second and third quarters versus the first and fourth
quarters of the year, combined with the impact of fixed costs, such as
depreciation, amortization and interest, which are not significantly impacted by
business seasonality.
Note 4 - Inventories
<TABLE>
<CAPTION>
September December
2, 2000 25, 1999
------- --------
<S> <C> <C>
Raw materials and supplies................................... $ 119 $ 110
Finished goods............................................... 192 183
------ ------
$ 311 $ 293
====== ======
Note 5 - Property, Plant and Equipment, net
September December
2, 2000 25, 1999
------- --------
Land......................................................... $ 144 $ 145
Buildings and improvements................................... 870 852
Production and distribution equipment........................ 2,146 2,112
Marketing equipment.......................................... 1,713 1,596
Other........................................................ 89 84
------ ------
4,962 4,789
Accumulated depreciation..................................... (2,666) (2,571)
------ ------
$2,296 $2,218
====== ======
</TABLE>
-6-
<TABLE>
<CAPTION>
Note 6 - Comprehensive Income
12-weeks Ended 36-weeks Ended
-------------- --------------
September September September September
2, 2000 4, 1999 2, 2000 4, 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income........................................ $ 123 $ 92 $ 225 $ 109
Currency translation adjustment................... (13) (8) (34) (4)
Minimum pension liability adjustment.............. - - - 19
------ ------ ------ ------
Comprehensive Income.............................. $ 110 $ 84 $ 191 $ 124
====== ====== ====== ======
</TABLE>
Note 7 - Comparability of Results
Asset Lives
-----------
At the beginning of fiscal year 2000, we changed the estimated useful lives
of certain categories of assets primarily to reflect the success of our
preventive maintenance programs in extending the useful lives of these assets.
The changes, which are detailed in the table below, lowered total depreciation
cost by $16 million, or $0.06 per diluted share, and $48 million, or $0.18 per
diluted share, for the 12 and 36-weeks ended September 2, 2000, respectively.
Estimated Useful Lives
----------------------
(in years)
----------
2000 1999
---- ----
Manufacturing equipment............................... 15 10
Heavy fleet........................................... 10 8
Fountain dispensing equipment......................... 7 5
Small specialty coolers and marketing equipment....... 3 5 to 7
Initial Public Offering
-----------------------
The 1999 financial information for the period prior to our initial public
offering has been carved out from the financial statements of PepsiCo using the
historical results of operations and assets and liabilities of our business. The
Condensed Consolidated Financial Statements reflect certain costs that may not
necessarily be indicative of the costs we would have incurred had we operated as
an independent, stand-alone entity from the beginning of 1999. These costs
include an allocation of PepsiCo corporate overhead and interest expense, and
income taxes:
o We included corporate overhead related to PepsiCo's corporate
administrative functions based on a specific identification of
PepsiCo's administrative costs relating to the bottling operations
and, to the extent that such identification was not practicable, based
upon the percentage of our revenues to PepsiCo's consolidated net
revenues. These costs are included in selling, delivery and
administrative expenses in our Condensed Consolidated Statements of
Operations.
-7-
o We allocated $3.3 billion of PepsiCo debt to our business. We charged
interest expense on this debt using PepsiCo's weighted-average
interest rate. Once we issued $3.3 billion of third-party debt in the
first quarter of 1999, our actual interest rates were used to
determine interest expense for the remainder of the year. Allocated
interest expense was deemed to have been paid to PepsiCo, in cash, in
the period in which the cost was incurred.
o We reflected income tax expense in our Condensed Consolidated
Financial Statements as if we had actually filed a separate income tax
return. Our allocable share of income taxes was deemed to have been
paid to PepsiCo, in cash, in the period in which the cost was
incurred.
The amounts of the historical allocations described above are as follows:
1999
----
Corporate overhead expense................................... $ 3
Interest expense............................................. $ 28
PepsiCo weighted-average interest rate....................... 5.8%
In addition, our historical capital structure is not representative of our
current structure due to our initial public offering. In 1999, immediately
preceding the offering, we had 55,000,000 shares of common stock outstanding. In
connection with the offering, we sold 100,000,000 shares to the public. Pro
forma 1999 average shares outstanding reflect our initial public offering as if
it occurred on the first day of fiscal year 1999.
Note 8 - Non-cash Compensation Charge
In connection with the consummation of our initial public offering,
substantially all non-vested PepsiCo stock options held by our employees vested.
As a result, we incurred a $45 million non-cash compensation charge in the
second quarter of 1999 ($29 million after tax or $0.19 per share based on pro
forma weighted-average shares outstanding), equal to the difference between the
market price of the PepsiCo capital stock and the exercise price of these
options at the vesting date.
-8-
Item 2.
Management's Discussion and Analysis of Results of Operations and Financial
-------------------------------------------------------------------------------
Condition
---------
Overview
Since becoming a public company through an initial public offering on March
31, 1999, The Pepsi Bottling Group, Inc. (collectively referred to as "PBG,"
"we," "our" and "us") has made substantial progress against our key objectives -
fixing the economics of our take-home business, aggressively growing our
high-margin cold drink volume and sharply improving our international business.
This trend has continued in the third quarter:
o We delivered 13% and 16% constant territory EBITDA growth in the third
quarter and first 36-weeks of 2000, respectively.
o We delivered third quarter, constant territory volume growth of nearly
2%. On a year-to-date basis, worldwide constant territory volume grew 1%.
o We delivered $0.82 in diluted earnings per share in the third quarter, an
increase of $0.23 over 1999. On a year-to-date basis, diluted earnings per
share grew $0.62 from $0.89 to $1.51 after adjusting the number of shares
outstanding in 1999 and excluding a 1999 non-cash compensation charge.
o We generated $204 million of operating free cash flow in the first 36-weeks
of 2000, $112 million better than the prior year.
The following management's discussion and analysis should be read in
conjunction with our Condensed Consolidated Financial Statements and
accompanying footnotes along with the cautionary statements at the end of this
section.
Constant Territory
We believe that constant territory performance results are the most
appropriate indicators of operating trends and performance, particularly in
light of our stated intention of acquiring additional bottling territories, and
are consistent with industry practice. Constant territory operating results are
achieved by adjusting current year results to exclude significant current year
acquisitions and adjusting prior year results to include the results of
significant prior year acquisitions as if they had occurred on the first day of
the prior fiscal year. Constant territory results also exclude any unusual
impairment and other charges and credits.
Use of EBITDA
EBITDA, which is computed as operating income plus the sum of depreciation,
amortization and any unusual non-cash charges and credits, is a key indicator
management and the industry use to evaluate operating performance. It is not,
however, required under generally accepted accounting principles and should not
be considered an alternative to measurements required by GAAP such as net income
or cash flows.
-9-
Comparability of Results
Asset Lives
-----------
At the beginning of fiscal year 2000, we changed the estimated useful lives
of certain categories of assets primarily to reflect the success of our
preventive maintenance programs in extending the useful lives of these assets.
The changes, which are detailed in Note 7 to the Condensed Consolidated
Financial Statements, lowered total depreciation cost by $16 million, or $0.06
per diluted share, and $48 million, or $0.18 per diluted share, for the 12 and
36-weeks ended September 2, 2000, respectively. We anticipate that this change
will reduce full year 2000 depreciation expense by approximately $70 million
equivalent to $0.27 per diluted share.
Initial Public Offering
-----------------------
The 1999 financial information for the period prior to our initial public
offering has been carved out from the financial statements of PepsiCo using the
historical results of operations and assets and liabilities of our business. The
Condensed Consolidated Financial Statements reflect certain costs that may not
necessarily be indicative of the costs we would have incurred had we operated as
an independent, stand-alone entity from the beginning of 1999. These costs
include an allocation of PepsiCo corporate overhead and interest expense, and
income taxes. We reflected income tax expense in the Condensed Consolidated
Financial Statements as if we had actually filed a separate income tax return
and allocated overhead and interest expense as follows:
1999
----
Corporate overhead expense......................................... $ 3
Interest expense................................................... $ 28
PepsiCo weighted-average interest rate............................. 5.8%
In addition, our historical capital structure is not representative of our
current structure due to our initial public offering. In 1999, immediately
preceding the offering, we had 55,000,000 shares of common stock outstanding. In
connection with the offering, we sold 100,000,000 shares to the public.
Results of Operations
---------------------
<TABLE>
<CAPTION>
Reported and Constant
Territory Change
----------------
September 2, 2000
-----------------
12-weeks 36-weeks
-------- --------
<S> <C> <C>
EBITDA.............................. 13% 16%
Volume.............................. 2% 1%
Net Revenue per Case................ 3% 4%
</TABLE>
EBITDA
Reported EBITDA was $365 million and $845 million in the third quarter and
first 36-weeks of 2000, respectively, representing a 13% and 16% increase over
the same periods of 1999. This growth was a reflection of strong pricing in U.S.
foodstores, an increased mix of higher margin cold drink volume, favorable cost
of sales trends and continued growth in our operations outside the U.S.,
particularly in Russia.
-10-
Volume
Our worldwide physical case volume grew nearly 2% in the quarter and 1%
year-to-date on both a reported and constant territory basis. In the U.S.,
reported volume turned positive in the quarter and was flat year-to-date. On a
constant territory basis, U.S. volume was positive in the quarter with
year-to-date volume down 1% as growth in our cold drink segment was offset by
declines in our take home business. Our cold drink trends reflect our successful
placement of cold drink equipment as our net placements have continued at a rate
which should allow us to meet our 2000 North American target of 150,000 net
placements. While take-home volume remained lower in the quarter and first
36-weeks of 2000 reflecting the effect of our price increases in that segment,
volume growth began to improve toward the end of the third quarter.
Outside the U.S., our constant territory volumes remained strong, growing
6% in both the quarter and year-to-date, led by Russia where we have
aggressively reestablished brand Pepsi, introduced our own line of value brand
beverage products (Fiesta) and continued to increase distribution of our water
products. Partially offsetting the growth in Russia were volume declines in
Canada resulting from significant price increases in foodstores in that country.
Net Revenues
Third quarter net revenues were $2,125 million, a more than 4% increase
over the prior year. Year-to-date net revenues grew by 5% to $5,583 million. On
a constant territory basis, worldwide net revenue per case grew 3% and 4% in the
quarter and for the first 36-weeks of 2000, respectively. These increases were
driven by strong pricing, particularly in U.S. foodstores, and an increased mix
of higher-revenue cold drink volume. Reported net revenues and net revenue per
case were lowered by approximately 1 percentage point due to currency
translations in both the quarter and 36-weeks ended September 2, 2000.
Cost of Sales
Cost of sales was essentially flat for both the quarter and year-to-date
when compared to the same periods of 1999. On a per case basis, cost of sales
was more than 1% better in the quarter and 1% year-to-date. Included in the
current year costs is the favorable impact from the change in our estimated
useful lives of manufacturing assets, which totaled $8 million and $25 million
in the third quarter and first 36-weeks of 2000, respectively. Currency
translations had an approximately 1 percentage point favorable impact on the
third quarter and year-to-date results. Excluding the effects of the change in
depreciation lives and currency translations, cost of sales on a per case basis
were almost 2% higher in the quarter and year-to-date, as higher U.S.
concentrate costs were partially offset by favorable packaging and sweetener
costs.
Selling, delivery and administrative expenses
Selling, delivery and administrative expenses grew $37 million, or 6%, in
the third quarter, bringing year-to-date growth to $128 million, or 7%, over the
comparable periods in 1999. Current year costs include the favorable impact from
the change in our estimated useful lives of selling and delivery assets and
currency translations. Depreciation expense was lower by $8 million and $23
million in the third quarter and first 36-weeks of 2000, respectively, as a
result of the changes in estimated useful lives. Currency translations had a 1
percentage point favorable impact on the third quarter and year-to-date results.
Excluding the effects of the change in depreciation lives and currency
translations, selling, delivery and administrative expenses were 8% higher in
the quarter and 9% higher year-to-date, primarily reflecting our continued heavy
investment in our North American cold drink infrastructure resulting in
additional headcount, delivery routes and depreciation. In addition, higher
marketing and advertising costs to promote our products and higher performance
based compensation costs including costs associated with our previously
announced 401(k) plan contributed to the cost growth.
-11-
Interest expense, net
Interest expense was flat in the quarter and decreased $8 million
year-to-date primarily reflecting lower external debt outside the U.S. in the
first half of 2000.
Non-cash Compensation Charge
In connection with the consummation of our initial public offering,
substantially all non-vested PepsiCo stock options held by our employees vested.
As a result, we incurred a $45 million non-cash compensation charge in the
second quarter of 1999 ($29 million after tax or $0.19 per share based on pro
forma weighted-average shares outstanding), equal to the difference between the
market price of the PepsiCo capital stock and the exercise price of these
options at the vesting date.
Minority Interest
PBG and PepsiCo contributed bottling businesses and assets used in the
bottling businesses to Bottling Group, LLC, our principal operating subsidiary,
in connection with the formation of Bottling Group, LLC. As a result of the
contribution of these assets, we own 92.9% of Bottling Group, LLC and PepsiCo
owns the remaining 7.1%. Accordingly, starting from our initial public offering
on March 31, 1999, our Condensed Consolidated Financial Statements reflect
PepsiCo's share of consolidated net income of Bottling Group, LLC as minority
interest in our Condensed Consolidated Statements of Operations.
Provision for Income Taxes
Our full year forecasted tax rate for 2000 is 37% and this rate has been
applied to our 2000 results. This rate corresponds to an effective tax rate,
excluding any unusual impairment and other charges and credits, of 38% in 1999.
The one point decrease is primarily due to the reduced impact of fixed
non-deductible expenses on higher anticipated pre-tax income in 2000.
Earnings Per Share
<TABLE>
<CAPTION>
12-weeks Ended 36-weeks Ended
-------------- --------------
September September September September
2, 2000 4, 1999 2, 2000 4, 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic earnings per share on reported net income.......... $ 0.84 $ 0.59 $ 1.52 $ 0.93
Average shares outstanding (millions).................... 147 155 148 117
Diluted earnings per share on reported net income........ $ 0.82 $ 0.59 $ 1.51 $ 0.93
Average shares outstanding (millions).................... 149 155 149 117
</TABLE>
Diluted earnings per share reflect the potential dilution that could occur
if stock options from our stock compensation plan were exercised or converted
into common stock that would then participate in net income. Our significant
share price improvement during 2000 has resulted in $0.02 per share of dilution
in the quarter and $0.01 per share of dilution year-to-date.
Our historical capital structure is not representative of our current
structure due to our initial public offering. In 1999, immediately preceding the
offering, we had 55 million shares of common stock outstanding. In connection
with the offering, we sold 100 million shares of common stock to the public and
used the $2.2 billion of proceeds to repay obligations to PepsiCo and to fund
acquisitions.
-12-
The table below sets forth 1999 earnings per share adjusted for the initial
public offering assuming 155 million shares had been outstanding for the entire
period presented. Shares outstanding in 2000 reflect the effect of our share
repurchase program, which began in October 1999 when our Board of Directors
authorized the repurchase of up to 10 million shares of our common stock. In the
second quarter of 2000, our Board of Directors authorized the repurchase of an
additional 5 million shares. Approximately 1.3 million shares were repurchased
in the third quarter of 2000 with a total of over 9 million shares repurchased
since the program began.
<TABLE>
<CAPTION>
12-weeks Ended 36-weeks Ended
-------------- --------------
September September September September
2, 2000 4, 1999 2, 2000 4, 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Diluted earnings per share on reported net income....... $ 0.82 $ 0.59 $ 1.51 $ 0.70
Pro forma average shares outstanding (millions)......... 149 155 149 155
</TABLE>
Liquidity and Capital Resources
-------------------------------
Cash Flows
Net cash provided by operating activities increased $114 million to $548
million in the first 36-weeks of 2000 driven by strong EBITDA growth combined
with improved working capital trends.
Net cash used by investments decreased by $162 million from $508 million at
the end of the third quarter of 1999 to $346 million in the first 36-weeks of
2000, primarily due to acquisition spending, which was $164 million lower in
2000. Capital expenditures decreased by $29 million, or 8%, as increases in the
U.S. associated with our cold drink strategy were offset by decreases outside
the U.S.
Net cash (used) provided by financing decreased from a source of $204
million in 1999 to a use of $101 million in 2000. This decrease resulted from
net cash received from IPO activities in 1999 coupled with $95 million of share
repurchases in 2000.
Euro
----
On January 1, 1999, eleven member countries of the European Union
established fixed conversion rates between existing currencies and one common
currency, the Euro. Beginning in January 2002, new Euro-denominated bills and
coins will be issued, and existing currencies will be withdrawn from
circulation. Spain is one of the member countries that instituted the Euro and
we have established plans to address the issues raised by the Euro currency
conversion. These issues include, among others, the need to adapt computer and
financial systems, business processes and equipment, such as vending machines,
to accommodate Euro-denominated transactions and the impact of one common
currency on cross-border pricing. Since financial systems and processes
currently accommodate multiple currencies, we do not expect the system and
equipment conversion costs to be material. Due to numerous uncertainties, we
cannot reasonably estimate the long-term effects one common currency may have on
pricing, costs and the resulting impact, if any, on the financial condition or
results of operations.
-13-
Cautionary Statements
---------------------
Except for the historical information and discussions contained herein,
statements contained in this Form 10-Q may constitute forward-looking statements
as defined by the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are based on currently available competitive,
financial and economic data and our operating plans. These statements involve a
number of risks, uncertainties and other factors that could cause actual results
to be materially different. Among the events and uncertainties that could
adversely affect future periods are lower-than-expected net pricing resulting
from marketplace competition, material changes from expectations in the cost of
raw materials and ingredients, an inability to achieve the expected timing for
returns on cold drink equipment and employee infrastructure expenditures,
material changes in expected levels of marketing support payments from PepsiCo,
Inc., an inability to meet projections for performance in newly acquired
territories, unexpected costs associated with conversion to the common European
currency and unfavorable interest rate and currency fluctuations.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have no material changes to the disclosures made on this matter in our
1999 Annual Report on Form 10-K.
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
(a) Annual Meeting of Shareholders of The Pepsi Bottling Group, Inc. was held on
May 24, 2000.
(b) The names of all directors are set forth in (c) below. The proxies for the
meeting were solicited pursuant to Regulation 14 under the Securities
Exchange Act of 1934. There no solicitations in opposition to the nominees
as listed in the proxy and all such nominees were elected.
(c) A brief description of each matter voted on and the number of votes cast are
as follows:
<TABLE>
<CAPTION>
Number of Shares (millions)
---------------------------
Broker
Description of Proposals For Against Abstain Non-votes
------------------------ --- ------- ------- ---------
<S> <C> <C> <C> <C>
1) Election of Directors
Linda G. Alvarado 158 N/A 1 N/A
Barry H. Beracha 159 N/A 1 N/A
John T. Cahill 159 N/A 1 N/A
Thomas W. Jones 159 N/A 1 N/A
Thomas H. Kean 159 N/A 1 N/A
Susan D. Kronick 159 N/A 1 N/A
Robert F. Sharpe, Jr. 158 N/A 1 N/A
Karl M. von der Heyden 158 N/A 1 N/A
Craig E. Weatherup 159 N/A 1 N/A
2) Approval of the PBG Long-Term Incentive Plan 143 10 - 6
3) Approval of the PBG Executive Incentive
Compensation Plan 155 4 - N/A
4) Approval of the appointment of KPMG LLP as
independent auditors 159 - - N/A
</TABLE>
-14-
Independent Accountants' Review Report
--------------------------------------
The Board of Directors
The Pepsi Bottling Group, Inc.
We have reviewed the accompanying Condensed Consolidated Balance Sheet of The
Pepsi Bottling Group, Inc. as of September 2, 2000, and the related Condensed
Consolidated Statements of Operations for the twelve and thirty-six weeks ended
September 2, 2000 and September 4, 1999 and the Condensed Consolidated
Statements of Cash Flows for the thirty-six weeks ended September 2, 2000 and
September 4, 1999. These Condensed Consolidated Financial Statements are the
responsibility of The Pepsi Bottling Group, Inc.'s management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical review procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the Condensed Consolidated Financial Statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the Consolidated Balance Sheets of The Pepsi Bottling Group, Inc. as
of December 25, 1999, and the related Consolidated Statements of Operations,
Cash Flows and Changes in Shareholders' Equity for the fifty-two week period
then ended not presented herein; and in our report dated January 25, 2000, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying Condensed
Consolidated Balance Sheet as of December 25, 1999, is fairly presented, in all
material respects, in relation to the Consolidated Balance Sheet from which it
has been derived.
/s/ KPMG LLP
New York, New York
October 4, 2000
-15-
PART II - OTHER INFORMATION AND SIGNATAURES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Index to Exhibits on page 18.
-16-
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
THE PEPSI BOTTLING GROUP, INC.
------------------------------
(Registrant)
Date: October 16, 2000 Andrea L. Forster
---------------- -----------------
Vice President and
Controller
Date: October 16, 2000 Lionel L. Nowell III
---------------- --------------------
Executive Vice President and
Chief Financial Officer
-17-
INDEX TO EXHIBITS
ITEM 6 (a)
EXHIBITS
--------
Exhibit 11 Computation of Basic and Diluted Earnings Per Share
Exhibit 27.1 Financial Data Schedule 36-weeks ended September 2, 2000
-18-
EXHIBIT 11
The Pepsi Bottling Group, Inc.
Computation of Basic and Diluted Earnings Per Share
(in millions, except per share data)
<TABLE>
<CAPTION>
12-weeks Ended 36-weeks Ended
-------------- --------------
9/02/00 9/04/99 9/02/00 9/04/99
------- ------- ------- -------
Number of shares on which basic earnings per share is based:
<S> <C> <C> <C> <C>
Average outstanding during period................ 147 155 148 117
Add - Incremental shares under stock
compensation plans............................. 2 - 1 -
----- ----- ----- -----
Number of shares in which diluted
earnings per share is based...................... 149 155 149 117
Net earnings applicable to common
shareholders (millions)......................... $ 123 $ 92 $ 225 $ 109
Net earnings on which diluted earnings
per share is based (millions)................... $ 123 $ 92 $ 225 $ 109
Basic earnings per share........................... $0.84 $0.59 $1.52 $0.93
Diluted earnings per share......................... $0.82 $0.59 $1.51 $0.93
</TABLE>
-19-
